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Amazon Banking Targets Low-Income Shoppers

Wayne Duggan

Bank investors may have gotten a little bit uneasy this week after the Wall Street Journal reported that Amazon.com, Inc. (Nasdaq: AMZN) is exploring the possibility of launching Amazon-branded checking accounts for customers. On the surface, it may appear that Amazon is directing its famous disruption power at the banking industry, but Amazon checking may actually be about growing Amazon Prime's footprint.

According to Bank of America analyst Justin Post, Amazon checking is likely targeted at expanding Amazon Prime's penetration rate among lower income customers.

"We think AMZN's aim with expanding its financial offering is less about disrupting the financials sector and more about increasing engagement on its own marketplace," Post says.

[See: 7 of the Best Bank Stocks to Buy for 2018.]

Post says by partnering with J.P.Morgan Chase & Co. ( JPM), Amazon will likely avoid all the headaches involved in legally becoming a bank. Instead, Post says the company is more concerned with providing deposit accounts that customers can easily use to make purchases on Amazon's marketplace.

Amazon has dipped its toes into the world of finance in the past. Last summer, the company said it made more than $1 billion in small loans to third-party sellers over the preceding 12 months. Amazon also worked with J.P.Morgan to launch a co-branded credit card in 2002.

Post says Amazon checking is likely aimed at younger, "underbanked" customers who may have a difficult time shopping online. According to Bank of America, Amazon Prime has a 70 percent penetration rate among U.S. households earning at least $50,000 per year but just a 56 percent penetration rate among households earning less than $50,000.

Overall, Post says the banking business will have limited direct impact on Amazon's bottom line.

"Like Prime, AMZN may want to offer checking incentives to drive customer lock-in and higher long-term retail sales," Post says.

GBH Insights head of technology research Daniel Ives says Amazon's diversified business and heavy investments in fulfillment, Prime, Echo, AWS and Whole Foods are building the foundation for long-term margin expansion.

"Amazon is on track to comprise about 50 percent of all US e-commerce spending by 2019, up from 44 percent in 2017 based on our analysis, and remains one of our favorite secular tech growth names for fiscal 2018," Ives says.

[See: 8 Catalysts That Are Moving Amazon Stock.]

GBH has a "highly attractive" rating and $1,850 price target for Amazon. Bank of America has a "buy" rating and $1,650 target for AMZN stock.

Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at wpd@tradingcommonsense.com.